How Long Can IRS Audit? Tips To Cut Years And Audit Risks

No one wants to be audited by the IRS, and it is only natural to worry about it. Even if you think your tax return is pristine, gathering receipts is no fun, nor is explaining what you did and why. If your returns have unusual or aggressive items, it can be way worse. So how long must you worry? It pays to know how far back you can be audited, and there are steps you can take to cut your risk. But let's start with the basics. The IRSusually has three years after you file to audit you. But there are many exceptions that give the IRS six years or longer.

IRS Audit report and calculator on a desk.

The three years is doubled to six if you omitted more than 25% of your income. For years, there was a debate over what it means to omit income from your return. Taxpayers and some courts said "omit" means leave off, as in don't report. But the IRS said it was much broader, including reporting that has the effect of an omission of income. Say you sell a piece of property for $3M, claiming that your basis (what you invested in the property) was $1.5M. In fact, your basis was only $500,000. The effect of your basisoverstatementwas that you paid tax on only $1.5M of gain, when youshouldhave paid tax on $2.5M.

In U.S. v. Home Concrete & Supply, LLC,the Supreme Court slapped down the IRS, holding that overstating your basis isnotthe same as omitting income. The Supreme Courtsaid 3 years was plenty for the IRS to audit. Then, Congressoverruled the Supreme Court, and gave the IRS six years in such a case. Six years is a long time. Filing your tax return early won't help either. The time periods can be even longer in some cases. The IRS hasno time limitif you never file a return or file fraudulently. Even so, the practical limit for the IRS to go back is usually six years.

Another scary rule is that the IRS can audit forever if you omit certain tax forms. Plus, once a tax assessment is made, the IRScollectionstatute is typically 10 years. And, in some cases that ten years can essentially be renewed. That's one reason the IRS can sometimes go back an astounding 30 years! In Beeler v. Commissioner, the Tax Court held Mr. Beeler responsible for 30 year-old payroll tax penalties.

Figuring out the applicable statute of limitations that applies to your situation--and then waiting it out--can be nerve-wracking. An audit can involve targeted questions and requests of proof of particular items only. Alternatively, audits can also cover the waterfront, asking for proof of virtually every line item. Frequently, the IRS says it needs more time to audit. The IRS will ask you to sign a form extending the statute of limitations, usually for a year. If you don't sign, the IRS will send you a tax bill, usually based on unfavorable assumptions. Most tax advisers generally tell clients to agree to the extension. However, it's best to get some professional advice about your own situation. You may be able to limit the time or scope of the extension.

Another hot button that impacts the statute of limitations involves offshore accounts. The IRS goes after offshore income and assets in a big way, and that dovetails with another IRS audit rule. The IRS also gets six years to audit if you omitted more than $5,000 of foreign income (say, interest on an overseas account). That matches the audit period for FBARs, annual offshore bank account reports that can carry civil and even criminal penalties far worse than those for tax evasion.

For all these reasons, be careful and keep good records. You should keep copies of your old tax returns forever. But after a time–many people say seven years–you should be able to throw out records and receipts. Yet some records such as improvements to property that go into your basis, are exceptions. If you remodel your kitchen and sell your house 20 years later, the receipts for your remodeling job are still relevant to your tax return.

Here are some tips:

Keep good records, and keep copies of all your past tax returns;

Report all your income, and disclose your tax positions on your return, even if you are claiming the money isn't taxable, is taxable as capital gain, or whatever;

Consider having your return professionally prepared;

Report offshore accounts on both tax returns and FBARs, and make sure you file any other forms that could extend your statute to six years or forever;

Steer clear of tax shelters and things the IRS counts as 'listed transactions' that can bring trouble; and

If you have big tax issues about a particular issue--say a lawsuit recovery, casualty loss, etc., consider getting targeted tax advice for that item from a tax lawyer or CPA.

If the IRS does contact you, consider getting professional advice. And don't ignore the IRS. Sometimes issues can be addressed easily if you do it carefully and timely.

I handle tax matters across the U.S. and abroad (www.WoodLLP.com), addressing tax problems, tax disputes, writing tax opinions, tax advice on legal settlements, transactions, crypto, and many other matters. You can reach me at Wood@WoodLLP.com.

This is not legal advice. For tax alerts or tax advice, email me at Wood@WoodLLP.com.